Economics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Page Links

Tory Economics

Microeconomics

Macroeconomics

Growth

Office for National Statistics

Measuring social value

Trickle Down

Torture the data

Good Growth

Send in the psychologists

Useful economics?

Open for business

Monetary Policy (Biscuit) Committee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited resources

In 1932 Lionel Robbins caused a bit of a stir by suggesting that economics might be defined as "the science of human actions in the face of limited resources with multiple uses". Forty years later, in 1971, US economist, Gary Becker, suggested that economics was the "study of the allocation of scarce resources to satisfy competing ends".

Robbins and Becker were generations apart but they both sold the same claptrap about scarce resources and people competing over their use. When the banks were asking for 40% deposits for home loans, first time buyers were not competing, they were being denied access to the market, just as surely as a peasant farmer being dispossessed by sheep because the lord who owned the land wanted to get into the wool market.

Scarcity in economic thinking is presented as a given, a constant fact, sent to perplex expert minds. However, over the generations, having swallowed all the nonsense about resources being scarce, the experts have failed to provide a solution to what they call the 'economic problem' - how to optimise the allocation of those scarce resources between competing ends.

Re-defining economics

Suppose for a rare moment that Robbins or Becker had reworded their memorable definitions along the lines:

"Economics is the study of the abundance of resources and how they may be applied in cooperative ways to enhance the lives of the majority of the population".

The notion of scarce resources may serve the lord turned sheep farmer very well but who else does it serve, more pointedly, who says resources are scarce? At which point some wit from a Tory think tank pops up and tells us that those in need of life changing cancer drugs can't have them because of all the competing demands on the public purse. Meaning we can't engage in pointless and very expensive wars in Iraq and Afghanistan and alleviate suffering here at home. There you have it, a water tight argument to support the view that resources are scarce due to competing ends. Maybe so but only if you ignore that element of the new definition of economic study suggested above concerned with enhancing the lives of the majority. In the case of this example, decisions have clearly been made to allocate resources in favour of foreign armed interventions against the alleviation of suffering provided by the NHS.

We live in a world of abundance, not scarcity.

We also live in world of high fences that prevent access to resources for the majority. That's the problem with economics as it currently exists, it has no purpose or rather it has a pointless purpose.

Employing the best mathematical minds to study optimum resource allocation that only serves the people who own the fences appears to be limited in ambition.

Fairy Stories

Economics seeks to understand how markets work. All economics textbooks start in the same place, telling a fairy story about a perfect market. By the time you reach chapter six you will be told that markets are not really perfect. Then, you may well wonder why the writer didn't start at chapter six, instead of wasting your time with a mythical world that does not exist. However, if you have never encountered a guide to micro economics, the next few short paragraphs will bring you up to speed.

Tory Economics


In 1936, Keynes used the term animal spirits in his seminal work The General Theory of Employment, Interest and Money to describe the chief motivating factor in economic activity, confidence. An economy devoid of confidence is stagnant or going backwards. Engendering confidence is a prime activity for government, if their policy objectives are to succeed then they must persuade us that their policies are sound. The present Tory government is attempting to do this by adjusting our expectations to a sub-optimal future.

Tory economics is simple to understand, it's based on hope, osmosis and the Chinese. Central to Tory thinking here is the work of Adam Smith, and the retelling of Smith by Hayek, with a pinch of Milton Friedman thrown in to spice up the mix. The Tory economy works as described in the school boy text book model, supply and demand, perfect knowledge and price signals - that's it, competition will produce an optimum outcome - just wait and see. Now, if we add in some hot air to hope and osmosis we have the measure of Tory economics. For good measure, we may also add in a couple of false prophets like Reinhart and Rogoff, whose assertions Boy George Osborne thought so profound that he used them to support his public sector cuts agenda.

Microeconomics for beginners: the short version

A market is a place where buyers and sellers come to together to exchange goods. In the market place, resources are allocated by the price of the goods being traded. Price signals tell buyers and sellers how much to buy and how much to sell. This price signalling mechanism establishes the level of demand and supply in the market place, it finds a natural balance; economists call this equilibrium, i.e. where supply exactly matches demand at a given price.

Equilibrium is a harmonious state, buyers and sellers are both happy as Larry - no market interference, perfect! Also, buyers and sellers have perfect knowledge, i.e. when making decisions they know everything there is to know about the markets they trade in.

But, you knew there would be a but, the perfect market doesn't exist. Otherwise, economics textbooks would be printed on beer mats. And neither do people with perfect knowledge exist. Otherwise, there would no scope for banks to rob their customers by selling them worthless insurance.

All markets are subject to interference, that is, political interference, monopoly power, deceitful criminality, and ignorance. Also, your understanding of economics will be stunted without some understanding of its historical development.

Significantly, the story of microeconomics is a story of theft, all the ideas in the school boy textbook, provided by academics down the years, especially from 1840 onwards, are designed to prop up the continuing privileges of the owners of capital.

Macroeconomics, enter Adam Smith

Through The Wealth of Nations Smith brought together a host of ideas that had been around for a long time, stretching back to Plato and Aristotle. His motivation was overwhelmingly political. Mercantilism, the prevailing world view in the 18th century was stifling innovation and progress. Smith championed the 'free market' in favour of the factory interest as opposed to the landed interest. Also, and importantly, Smith suggested that the nation's wealth should be measured in terms of the goods and services a nation produced instead of the amount of gold it kept in its counting house. This idea took hold and now GDP is universally used to measure national wealth.

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Growth

Since the Coalition decided to form a government in 2010, several times we have got set to organise a street party to celebrate the positive growth reports from the last quarter. Then we cancelled, the numbers were incorrect, our optimism premature.

The concept of growth implies that something is growing and by extension, politicians, will suggest that this something will benefit us as a nation. For instance, a rise in house sales is hailed as a sign of a return to economic health. All those financial transactions in the sale of second-hand homes, all the percentage clipping by estate agents, insurers, solicitors, surveyors, and bankers all clipping away at the grossly inflated value of historic assets. No new value is being created through such transactions, in reality nothing is growing - except, a growing sense of confidence in the underlying economy, or so we are told.

The Office for National Statistics compiles the growth figures and beyond capturing the re-churning activities of house purveyors they must also attempt to measure the value of imputed services, i.e. things like doctors appointments and visits to A&E departments, where no money changes hands, hence a downturn in the nation's health will also be hailed as a sign of benefit to the nation since the value of all those doctor visits will increase the growth numbers. Measuring inputted values is a tricky business because those supplying the values rely on the numbers for their livelihood, no incentive then to under report throughput.

The GDP data is compiled from thousands of surveys completed by businesses and is arguably the most important of all economic statistics, that's according to the chief economist at the ONS. He told the BBC:

"Information on sales is collected from 6,000 companies in manufacturing, 25,000 service sector firms, 5,000 retailers and 10,000 companies in the construction sector. Data are also collected from government departments covering activities such as agriculture, energy, health and education."

He also said that the ONS does not make mistakes but errors may occur due in incomplete data sets - now you know why those published quarterly figures are not always accurate.

However, the most important thing that the chief economist had to say was that if the quarterly number was up then the economy was growing, if the number was down it was contracting - staggering. The man from the ONS never said a growing economy made us better off, raised our standard of living, or improved the quality of our existence because he knows that his measure of growth has little to do with such concerns.

The Textbook View of economic growth

Consider the following statement from an A level economics textbook:

"You must remember that the main purpose of economic activity is to improve economic welfare and people's standard of living."

The textbook writers call such statements economic understanding, but this sentence does not describe a purpose, it describes an ambition. Improvements in living standards are purely the consequence of ensuring the robustness of the production system.

Ignoring things that matter

Does anyone understand what growth of 0.2% means, is it significant? Not if it only represents increased spending on advertising in an effort to boost flagging sales of things that people could well live without. That's the thing about the growth measure, it includes a whole host of items that contribute very little, in terms of social value.

Apart from the occasional inaccuracy of the growth reports we receive, there's a deeper problem, with what growth measures. That is, the things it doesn't measure, like social capital. Striving for the fast buck destroys communities, families, and local support systems. Growth measures output, the social value that's lost in the pursuit of that output goes unremarked.

It's almost tempting to suggest that the Tory obsession with measuring growth is just a distraction, a futile pursuit that adds nothing to the debate because the measuring process is so flawed. The quality of people's lives is what's important and the growth figures tell us nothing about such things.

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Trickle Down

At this point the economists inserted some faith, faith that some of the wealth created by economic growth would trickle down and somehow improve the lives of those at the margins. It makes perfect sense, as Del Boy might say, as the nation grows, its growing wealth is shared out for the betterment of all. The theory of trickle down was dreamt up by development economist pondering how third-world nations might grow themselves out of dire poverty. Their scribblings never did add up to more than a bag of beans with UNESCO printed on it, being sold off a market stall in downtown Kinshasa.

If you torture the data long enough it will confess

Every month the Back of England Monetary Policy Committee meet and decide to do nothing, except, occasionally, print some more money. Most of those who turn up for a few hours a month for tea and biscuits are signed up members of the school of econometrics.
Econometrics is a process that uses mathematics and statistics to test aspects of economic theory. They prefer to overlook that every aspect of economic theory has been tested to death over many anguished years.

If you create an industry, i.e. econometrics, it will produce a stream of data gathered from its testing frenzies and as likely or not it will tell you, after much hot air and convoluted nonsense, things you already knew; and you'll never know whether the data owned up honestly or confessed under torture.

As far back as the 1790s, Charles Babage, the father of computing, was writing about the cheating tricks of statisticians, principally manipulating the data to fit the theory, i.e. the outcome they desired. It was back then, in the eighteenth century that economic theory got started with Adam Smith's 'invisible hand', the idea that without any government meddling markets would manage themselves. In short, there would be no long term overpricing because the market by magic would correct the situation.

Now, fast forward a couple of hundred years, to the aftermath of the credit crunch of 2008, where much soul searching and blaming has taken place; it was the bankers, it was the regulators, the ratings agencies, it was the politicians and central bankers. Yes, it was all these guilty parties. Why, because underpinning their actions or lack of action was the notion that markets would be self-correcting. Alan Greenspan, at the time in charge of the US Fed, told a suspicious regulator not to worry about fraud in derivative trading because the market would take care of it. Not only were markets self-correcting, they were also capable of policing themselves.

The credit crunch, the crash, the recession were proof that markets were not working as described by the theory. Assets were over-priced, the free market believers knew this, like addicted gamblers, they just kept betting and believing. A study carried out by the IMF in 2002 found that 97% of economic forecasters failed to predict impending national recessions in the 1990s, let alone coming close to predicting their severity.

In sum, Tory economics is a credo that places blind faith in the power of the market place and seeks reassurance from charlatans and errant number crunchers who have a worse track record than Mystic Meg.


What does Dave's economic policy look like and will it resolve Britain's debt problems and lead to some virtuous growth path?

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Good Growth: when economics fails

A highly entertaining report was published by Demos 2011, with some help from PricewaterhouseCooper, entitled "Good Growth".

Demos, for those who don't know, is a Tory 'think tank' and PwC is the largest financial services company globally. The report we are told is tentative and preliminary, however, it was also important.

It was important because it was part of a futuristic trend in economics that attempts to reassess the role of government in the regulation of economic activity by identifying outcomes that enhance social wellbeing.

The focus of the report is "Good Growth", i.e. those variables that citizens consider central to promoting a happier existence than would be the case if the focus was simply on the growth of GDP.

Demos and PwC are not a bunch of happy clappers seeking to enlist citizens in a chorus of chanting for the sake of harmony. Their report fits with ongoing studies by the World Bank, the IMF and the Stiglitz Commission and the United Nations, as well as, our own ONS - busy compiling David Cameron's 'happiness index'.

Why, we need to ask, all this effort on what used to be called 'welfare economics' now, when that branch of the subject has largely been ignored by our politicians and the City spivs at the sambuca trough.

The whole of the capitalist enterprise can be summed up as follows, production damages people, government intervenes to alleviate the damage, over time material conditions improve but the damage takes on new forms, less obvious and more subtle, more psychological than physical.

The current prominence of the welfare agenda recognises that the pursuit of economic growth has had its day. The idea behind the current spate of studies into wellbeing is twofold; to inform the political elite's decision making in order to quiet the troubled minds of the citizenry, and to use the current economic crisis to reassess economic activity in order to promote human wellbeing rather than profit.

And can't you just hear Louis Armstrong singing 'And I think to myself, what a wonderful world'. The money grubbers will have no truck with the promotion of human wellbeing, unless they can turn a profit from it.

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Send in the psychologists

The notion of Good Growth, the idea that economic decision making should be cognisant of welfare improving policies suggests that markets cannot be trusted and waiting for economics to provide some solutions is a forlorn ambition.

Economics has failed, so send in the psychologists. In particular, send in B F Skinner, guru of behaviourism. All these reports and studies, all the data gathering are designed to capture the ingredients that Skinner identified for creating the engineered society. Skinner's thesis is simple; nebulous notions like freedom and dignity are unnecessary to lead a happy existence, all you need to do is change the material conditions in which people live, in short, change the environment to suit the behaviour you want.

Consider the current government's campaign to adjust citizens' attitudes to work and its rewards. Low pay, zero hours contracts, unpaid overtime, financial support for work related tribunals removed, and reducing/restricting access to the benefits system for those in work. The sum of these changes leads to reduced expectations for those at the bottom of the heap and for the nation, the sum of the government's adjustment process cannot be claimed as a welfare improvement.

What would make economics useful?

There are those who still believe that markets left to their own devices will lead to optimal resource allocation. Such belief borders on religiosity, the number of laws and regulatory watchdogs covering market activities should be enough to convince most people that markets don't work left to their own devices.

1. Re-focus on uneconomic activities, i.e. the behaviour of rentiers, people who earn a living like parasites feasting on the efforts of others.

Adam Smith was also alert to these parasites, of whom he said:

"...they love to reap where they never sowed."

In today's world, rentier culture is exemplified by the asset strippers, the private equity cowboys, and outsourcing blood suckers who feast on the carcass of the public sector, and tin rattling charities all at the centre of the action; turning a penny at someone else's expense. EU farm subsidies also nicely define the rentier outlook...

2. Re-focus on the activities of counter-productive professionals, e.g. tax accountants, who spend every waking hour manipulating the rules to assist their clients to avoid paying their due tax. Valuing the tax accountants contribution in social terms reveals a negative contribution. The negativity of the tax accountants efforts appears worse when compared to the social contribution of a low paid and poorly valued care worker. Which feeds into the revolutionary idea that rewards should be referenced by social contributions.

3. Re-focus on the work of those who contribute little or nothing in terms of social value. Workplaces and offices throughout the nation, both in the public and private sector are stuffed with people sharpening their pencils but otherwise adding no value. The development of a complex industrial society has led to a commensurate development of a self-perpetuating and nonsensical array of unnecessary official groups and committees. Many of these bureaucratic spore arise for no other reason than to inspect and oversee the activities of other spore.

Industrial society has also given birth to business activities of questionable social value, such as advertising, marketing and much of the fashion industry and mock industries such as alternative medicine and health and fitness. Perversely, we see governments wasting millions on advertising campaigns.The Department of Health in 2009 commissioned top ad agency M&C Saatchi to develop its £75 million anti-obesity advertising campaign.

4. Most importantly, the purpose of economic activity needs to be clarified. Watching disgraced bankers paying themselves millions of pounds in bonuses for no other achievement than robbing low paid workers blind is anti-social, the work of tax evading accountants is anti-social. Examples of the anti-social activity by the business community are not in short supply.

An environment where the business community prefers to pick the pockets of its customers rather than provide a worthwhile and honest service renders talk of social contribution meaningless. As is any concept of society. If private profit seeking is the business goal then talk of public benefit is just hopeful flim flam, i.e. a cover story that suggests that perhaps and maybe some good will arise from entrepreneurial good works. Something a bit more helpful than hope is required.

The next time some entrepreneur justifies their existence by claiming to be a job creator someone needs to shout - so what!

5. Efficiency should be central to any study of economic activity. Consider the instance of Chewits, a successful British company, snapped up by the spivs from Sambuca City, the workforce were sacked, the machinery was shipped to Eastern Europe. Upshot, financially this act of vandalism was more efficient but in social terms it can hardly be considered so, notwithstanding the dumping of a skilled labour force here, transporting sweets 800 miles back to Britain does not do much for the carbon footprint and no doubt, since the company is now based overseas, revenue and the tax associated with it will disappear.

The development of western capitalism has led to a totally inefficient use of human capital, apart from the employment of legions of people in non-productive and legions of others in anti-social activity, it has led to the brightest and the best being employed in financial fiddling rather than socially useful work, such as engineering and science.

Conclusions

Resources are not scarce, the 'economic problem' is that due to restrictive practices resources are made scarce for all but an elite few. The vast majority of economic activity is inefficient, and much that passes for work produces nothing of any social worth.

The bottom line: unless and until the political class finds the will and courage to challenge the status quo social improvement will be minimal to non-existent. In 2014, something called the Low Pay Commission was pontificating on whether or not to raise the Minimum Wage by some derisory amount.

Not once in the press chatter surrounding an anticipated announcement by The Low Pay Commission has anyone noted that over two hundred years ago Adam Smith described the iron law of wages :

“a man must always live by his work, and his wages must at least be sufficient to maintain him”

Two hundred years of so-called progress and all we can do is pay a man "sufficient to maintain him” - as long as we top up this sufficiency with State provided benefits, so that those talented entrepreneurs can maintain their profits.

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Open for business

"We are an open, global economy. We cannot start creating ownership barriers, trade barriers and protectionist barriers." That was how Dave set out his economic insight, quite where his current position on putting up barriers to the movement of labour fit in is something to wonder about.


Mr Cameron was happy to consider letting a Russian firm, the one behind the Chernobyl accident, run some of Britain’s next generation of nuclear power stations. He was only echoing governments' default position for the previous three decades. However, other developed economies have protection in place for what they consider key assets.

Three factors have encouraged foreign takeovers: the cheap cost of borrowing; liberal takeover rules; and the presence of global investment banks in the City, with ready access to the world’s capital.

The removal of regulations on overseas investment by former Tory Chancellor Geoffrey Howe in 1979 began the asset sales. This was followed in 1986 by what’s known as the ‘Big Bang’, foreign banks flooded into the City, gobbling up SG Warburg, Robert Fleming and Schroders to provide the cheap money for the takeover binge, and then Blair and Brown actively encouraged every foreign deal.

So most London buses are run by a Spanish company, Italians own Boots, Selfridges, Fortnum & Mason and the Savoy are owned by Canadians; Harrods has been bought by a firm based in Qatar, the Dorchester by one based in Brunei and Thames Water has gone to the Australians.
Britain's Sale of the Century includes Jaguar Rover (to India), Asda (to the U.S.), MG Rover (to China), P&O Ports (to Dubai), the British Airports Authority (to Spain), Corus (formerly British Steel, to India), British Energy (to France), and lottery operator Camelot (to Canada), ICI was snapped up by the Dutch. Shareholders and directors took the money and ran, and watched from a distance while the private equity cowboys brought Debenhams to its knees and nearly destroyed Southern Cross care homes. Laughingly, we even needed to rely on the computing power of Lockheed Martin to carry out the 2011 Census, at a cost of £160m.

The key problem with foreign ownership is that it's hard enough to collect taxes from a UK-based multinational, it is even harder to do so from one based in Munich, Lucerne or Washington DC. Boots the chemist was sold to the Italian pharmacy king Stefano Pessina and private-equity outfit KKR in 2007 for £12 billion. Boots — which had been based in Nottingham for 161 years — moved its headquarters to Zug in Switzerland. Before the takeover, Boots had paid £89 million in British tax in its final year as a quoted company on the London stock market. Now that it pays most of its tax in Zug, that figure has shrunk to just £9 million. Also, foreign firms who buy British companies using borrowed money are able to deduct the interest they have to pay on those loans from their tax bills.

Job losses, pay freezes, and vanishing skills

Beyond the loss of tax revenue; skills, scientific and technical know-how are lost when the foreigners come to town. These are key national assets in terms of global competition and when they've gone, as happened in the case of ICI they wont be coming back. AkzoNobel (the new owners) revealed massive losses of £970 million, largely as a result of buying ICI. Job losses at ICI reached 3,500 due to the takeover, more job losses were projected, and a pay freeze was imposed on most of the company’s employees.

When Kraft Foods took over Cadbury in 2009, it promised to keep open the Somerdale factory near Bristol but one month after buying the company Kraft closed it - leading to the direct loss of 400 jobs, and the indirect loss of others in the supply chain. Cadbury staff were told that pay would be frozen for three years unless they agreed to opt out of the firm’s expensive final-salary pension scheme.


Source: Britain For Sale: British Companies In Foreign Hands by Alex Brummer, April 2012.

Confusing a debt with a deficit

The Coalition government only has one policy, or only one that they have been consistent on, i.e reducing the structural element of the current deficit. The cuts agenda and the privatisation of all public services are presented as the solution to the debt problem.

This policy is the cause of Dave's main worry. Not because he may succeed or fail in his ambition but because the public do not understand it and quite often, when otherwise rational people do not understand, they discount. Now Dave's problem is this - come the next election, when he attempts to buy some credence for his valiant attempts to reduce the deficit, voters will still be scratching their heads. For instance, in a 2012 survey, 47% of people thought that the national debt would fall by £600bn by the end of this parliament. (Institute for Policy Studies, A Distorted Debate). The thing is, both Dave and his chum Boy George Osborne are both on record confusing the structural deficit with the national debt, so small wonder that citizens seemed confused. Other results from the survey showed that only 39% of the public correctly identified that the deficit has fallen since 2010, compared with 28% who believed this to be untrue.

Now, at the Tory Party Conference, Dave told the world that he had successfully reduced the deficit by 25%, not true. The structural component of the current deficit had only fallen by 13.2% by the end of 2011/12. In his 2014 Autumn statement, Boy George announced that the deficit had been cut by 50%. George is a liar. How can a government borrowing £250m a day be reducing the deficit? Fact, this coalition government have borrowed more in the past five years than New Labour did in 13 years.

The 2010 Fiscal targets

1. To eliminate the structural component of the current deficit within five years. (Note: the structural component arises because governments are continually and persistently spending more than they have coming in in revenues. Hence the attempt to reduce the borrowing that funds public expenditure.) This target will not be met. Elimination may be achieved by 2016/17 but then, it is a rolling target. The rolling target doesn't conceal the truth that spending is rising although cuts are being made to a variety of public sector budgets because as we roll along the proportion of claims on those budgets is rising, e.g. housing benefit has been capped but the number of working people claiming has risen over the past two years. Also, revenue is falling due to the success of our marvellous low wage economy.
2. The second target, for debt, as a proportion of GDP, to be falling by the end of this Parliament will not be met.

Hidden Debt

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Let's be clear, when George Osborne talks about the debt, he is talking about the 'structural deficit', i.e. his big problem. He and Dave claim to have reduced it by 50% already. The national debt, will also begin to fall, at some point in another lifetime. Sounds good, but not if you are hiding some of your current spending off balance sheet and if you are choosing to ignore a whole set of liabilities. If we add in these liabilities, items like public pensions, PFI funding, Network Rail, and bank bail-outs, we see the government’s official £1 trillion figure more than double that. (See The Hidden Debt Bombshell, Centre for Policy Studies)
The Institute for Economic Affairs tells us:
"The latest official national debt figure is seriously misleading. Looming in the background are pension liabilities." and "our real national debt stands at 333pc of GDP." That's £4.8 trillion.

The Fresh Air Deficit

Hidden debt is one thing, at least when we find it we can pin it on someone. However, we have another problem. Theory says that somewhere in the universe all loans are equal to all deposits. This is the universe of academic economists, where the potential for the endogeneity bias and the problem of reverse causation can be ironed out in models based on regression analysis. Ah, but what if there's an alternative universe, where deposits do not match loans, where not only is some of the debt fresh air, more debt is being created on a daily basis by the banks and the very idea of a central bank that controls the money supply is patent nonsense. In this universe, economic models have no answers. All you need in this universe is an error term to cover for the unaccountable funds.
Fictional Balance Sheets

PIRC, the shareholder advisory group, analysed the 2011 accounts of the UK's top five banks to calculate how much they expect to write off as bad debt in the coming years but haven't done so because they can hide behind some clever IFRS accounting rules; that they made up to protect themselves. However, the PIRC study provided the following picture, under the heading “Undeclared losses £bn”; Lloyds and Standard Chartered 3.6, Barclays 6.7, HSBC 16.1, and RBS 18.2.
So, not only are the government concealing the true national debt, the banks are concealing their own indebtedness. Dave can't be doing with alternative universes, fresh air deficits and fictional balance sheets, he needs someone to provide a realistic picture of where we are. It's a shame that Dave never considered popping round to the Treasury to remind the lazy buggers there that it was their job to provide the realistic picture. Enter the Office for Budget Responsibility. The role of the OBR is to monitor the government's fiscal targets and report on progress. Setting up the OBR was one the first acts of the ConDem regime and may have been cunningly designed to make it look to the outside world that we had an independent body overseeing the books - a confidence boost for global loan sharks. However, we also needed someone to monitor and investigate the dodgy balance sheets of the high street banks, and if ever the day comes to pass, someone to police the banks’ activities when their investment and retail antics are split. Dave has a plan, he's set up the Prudential Regulating Authority, to be run by the Bank of England. Dave also introduced the the Financial Conduct Authority in 2013 to replace the disgraced Financial Service Authority. So we can all sleep soundly now.

Bank of England Monetary Policy Committee

The Bank of England Monetary Policy (Biscuit) Committee was set up in 1998 by Gordon Brown, so that he wouldn't have to do anything. The Committee's remit is to set interest rates, to keep inflation within certain limits and to focus on growth and employment. The Committee is made up of a small select group of over-educated economists, including the Bank's Governor, four other bank employees and four external 'experts'. For the past several months, the Committee, has done little except consume vast quantities of digestive biscuits and voluminous quantities of tea. The Committee meet for two and a half days each month to deliberate. Most of this time is spent trawling through data both from the real economy (where goods are made and traded) and the Disney World of the money grubbing spivs.

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The Committee's Record To Date

Up and until 2008 the Committee failed to notice the looming crisis, after all Gordon had banished boom and bust. From 2008, the Committee were on two packets of digestives a month. Clearly action was required, they cut interest rates. Then they cut interest rates again. They kept cutting interest rates until they got down to 0.5%. To go lower wouldn't make any sense. The cuts already made had no impact on the real economy. Inflation continued to rise. Obviously, the rate cuts were holding inflation in check, meaning without the previous rate cuts, things would have been worse. Obviously.

However, inflation was above the 2% target, well above. So what do you do when the only tool you've got is interest rates and it doesn't work. Have another packet of biscuits. No! You create something called the Asset Purchase Facility (2009). Brilliant idea, basically you print some money, you use the money to buy assets that the banks are holding, the banks now have the cash to inject into the real economy. Well, dunk me another biscuit Mervyn. Thus far, the Bank has made £275bn available to the banking community through its policy of Quantitative Easing, QE.


The Committee couldn't do anything about inflation so it turned its attention to growth. The combination of low interest rates and liquidity in the system must engender some growth. Well, no, the banks didn't play the game and weren't keen to lend to support British business.
The reason the banks didn't play the game is quite simple. They were unable to find a way, after years of recklessness, to lend sensibly. So like an individual faced with an impending nervous breakdown, the best course of action is to do nothing, except speculate in commodities markets and push up domestic inflation? Essentially, the Committee put its faith in a banking community that was behaving like a stroke victim, fully conscious but seemingly unable to act.

The last quarter of 2010 saw -0.5% growth, the first quarter of 2011 saw 0.5% growth, in other words, no growth for six months. By the end of 2011, still no green shoots in evidence, moving on to the second quarter of 2012, sorry still no green shoots. Good news in the third quarter of 2012, Osborne claimed 1% growth and hailed the end of recession; Mervyn King announced a week later that the recession would continue for perhaps another three years. Mervyn has always been a glass half full sort of guy, by August 2014 the public were being told by Boy George that the recession was over.

In Sum: The Bank of England Monetary Policy Committee appear to be wasting their time. Admittedly, they are only paid in biscuits but that's far in excess of their economic rent, i.e. the difference between what they are paid now and what they would receive if they were selling the Big Issue. Their low interest rate policy has done nothing for the struggling real economy, it has helped existing mortgage holders but ill-served everyone else.
Globalisation has signed the death knell for inflation control, Britain is a price taker, not a price maker anymore. Low interest rates have forced down exchange rates and should encourage exports but can't stem the tide of imports for an economy reliant on imported goods. The balance of trade is unfavourable. Time to end the monthly biscuit beano.

Quantitative Easing is the means by which a failed political class attempts to ensure that a reckless financial community (reckless with other peoples' money) can continue to maintain its hedonistic lifestyle at the expense of the general populace. This was the Bank's key policy tool designed to boost growth in Britain plc. All we know about QE is that no one knows if it works. It has been tried across the globe variously, most famously in Japan but even after that experiment they don't know if it worked or not - brilliant. We also know that governments do not pursue a course of QE until they have taken interest rates as low as can before they become meaningless and then they start printing money - and hope.
The evidence is now legend, hope was hopeless, banks are not trustworthy intermediaries, so why does this Government insist on asking them to oil the wheels of recovery?

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Why not create another scheme?

Funding for Lending, i.e., another scheme to give the banks more cheap money to encourage them to lend to business, to help kick start the economy, seemed like something that might work but the banks showed a preference for lending to people wanting to buy property. The key idea behind this scheme was to help the banks out with the mismatch that exists between their assets and liabilities, given the term nature of mortgage debt. That is, too much mortgage debt can cause cash flow problems.

This scheme also meant that the banks had no incentive to increase rates for savers, after all they were getting cheap funds from the government. Mark Carney, George Osborne's new miracle man at the Bank of England, spotted that his funding for lending was not going to its intended recipients and blocked the banks dishing out this money for mortgages but he's still doing nothing for savers and he seems to be oblivious to the effects this cheap money is having on the annuities market. An annuity like a tattoo or dog is for life, citizens retiring now and in the near future are faced with a choice between one bad deal and the next to fund the rest of their lives. Osborne put an end to this disgrace in his 2014 budget, allowing retirees to do what they liked with their pension pots but he forgot to apologise to all those who have been ill-served down the years by the annuity scam.

Cutting Red Tape and ending the compensation culture

Tories have been trying to cut red tape items like health and safety at work for a long time. A 1994 review recommended 100 laws be removed, and in 2010 Lord Young published a review called "Common Sense – Common Safety".


However, the basis for current thinking on the subject stems from a 2012 review of existing health and safety regulations conducted by Professor Ragnar Löfstedfrom. New legislation will make it incumbent on the worker to prove that the employer was directly to blame for their accident. At the moment the legislation contains the concept of "strict liability" – whereby companies are liable for injuries regardless of negligence if certain health and safety rules are breached. The Tory view is that this is unfair to the employer because it forces employers to put unnecessary and costly health and safety measures in place.

Be in no doubt, the workplace is still a dangerous place; figures released by the Health and Safety Executive show that in 2011, 173 people died as a result of workplace accidents and 22,433 were seriously injured. The Professor never suggested that 'strict liability' should be removed in all circumstances but the Tories have other ideas.

The man from the Association of Personal Injury Lawyers, said the Government's proposals would "turn back the clock on workplace safety to the 19th century". Ah yes, marvelous times, 10 year olds getting mangled up by machines but let's also recall that it wasn't until 1974 that employers had to keep a record of accidents in their workplaces, and not until 1981 that they had to have first aid kit available and even later before stricter controls regulating dangerous chemicals came into being.

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